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July 31, 2014

3 Reasons New ETF Could Boost China, Germany Investment Ties

China is looking to the west for more investing opportunities, and one of its largest mainland fund managers has kicked things off with an ETF based on Germany’s DAX.

The HuaAn Germany DAX 30 ETF and its feeder fund, which were introduced by HuaAn Asset Management Co. Ltd. on July 14, will be listed on the Shanghai Stock Exchange once final regulatory approval is granted. HuaAn has over $13 billion in assets under management, and according to data from Deutsche Bank, 83 ETFs are currently listed in China with total assets under management of $23.9 billion.

STOXX Limited, which is the official marketing agent for the indices of Deutsche Börse and SIX, including the DAX, worked with HuaAn to bring about the new fund, which, while it is the first European ETF in China, is not the first European expansion into Asia this year. In April, the EURO STOXX 50 Index was licensed to Mirae Asset Global Investments for an ETF listed in Seoul on April 30.

Germany, however, has been a particular focus of China for a while. Perhaps it’s only natural that the first ETF in China based on a European index should be centered on Germany, since a decade ago China chose Germany’s Xetra trading platform to use for the Shanghai exchange.

Here are three reasons why the new ETF could help to cement investing ties between the two countries.

1. It opens the door. There’s already sizeable Chinese direct investment in Germany—more about that in a minute—but the new fund offers more Chinese investors access to the DAX, which measures the development of the 30 largest and most liquid companies on the German equities market and represents around 80% of the market capitalization authorized in Germany.

Johnny Lau, of HuaAn’s marketing department, said that the ETF’s target market was mainly “institutional investors, as well as clients who are interested in asset allocation. Meanwhile, the retail customers will be satisfied by the feeder fund.”

While the new ETF was currently “welcomed by [all] kinds of clients, we expect it to be the largest new launched qualified domestic institutional investor (QDII) fund [on the] China mainland in [the] last three years,” he said.

In addition, the fund is expected to broaden Chinese investors’ appetite for broader European investment. “This product ... opens the door to invest in Germany and EU for China investors. The era of global asset allocation has come to China,” said Li Qing, CEO of HuaAn, in a statement.

2. Other financial ties. Deutsche Börse also has an agreement with the Bank of China to collaborate on a mutual trading and clearing arrangement. That will permit Bank of China to underwrite Chinese IPOs in Frankfurt.

Not only that, but interest generated by an ETF accessible to institutional, and other, investors in China could also help Frankfurt advance its position against London as the two vie to become China’s go-to offshore financial center. Earlier this year, the People’s Bank of China (PBOC) signed a memorandum of understanding with the Bundesbank to set up a German center for offshore yuan clearing and settlement. Germany beat out both Paris and Luxembourg for the honor within the eurozone.

That was perhaps not surprising, considering that according to SWIFT data, Germany is one of the top five countries to use the RMB for trade with China; the others are Hong Kong, Singapore and Australia.

In addition, many German companies already use the renminbi for cross-border invoicing and payments, although some rely on renminbi clearing centers in Hong Kong and are slow to change the status quo. However, the SWIFT data show that in September of 2013, payments made in renminbi between Germany and China skyrocketed 70%, to make up 14.1% of all payments.

3. Builds on previous investment strategies. Another move made earlier this year was a boost in China’s renminbi qualified foreign institutional investor (RQFII) allowance. That opens the doors more widely to foreign investors and allows them to invest in mainland China A shares. With greater exposure to Chinese companies through increased Chinese investment in Germany, it’s likely that the interest within Germany will also increase in investing in China—although it’s already at a pretty impressive level, at nearly €39 billion ($52.392 billion).

According to the German Federal Foreign Office, “China is Germany’s most important economic partner in Asia and Germany is China’s leading trading partner in Europe.” Office statistics indicate that China is the fifth largest buyer of German exports and the second largest supplier of German imports. China’s direct investment in Germany in 2014 is approximately $3.1 billion, primarily in the sectors of mechanical engineering, electronics and consumer goods, as well as information and communication technologies.